WASHINGTON — There’s no better place to spend Christmas in the United States than San Diego. Amid the warmth and sun you see snow only on television. No high heating bills here.
Over a Christmas holiday when temperatures hovered in the 20s, San Diego’s electricity bills were among the highest in the nation. California’s power situation has since gone from bad to worse.
The state’s major utilities are heavily indebted, running out of cash and teetering on bankruptcy. In mid-January, California imposed rolling blackouts to prevent the entire power grid from collapsing. The biggest and richest state in the U.S. looks like a banana republic.
This wasn’t the way it was supposed to be when the state deregulated its utility industry in 1996. Gov. Gray Davis denounced the experience as “a colossal and dangerous failure.”
He criticized “profiteers,” urged investigation of alleged market manipulation and proposed seizure of the assets of “price gougers.” Rather than attempt to fix the system, he and other panicked politicians are pushing energy socialism.
Davis has threatened to use eminent domain to take over generating facilities. He also proposed criminalizing any refusal by California producers to sell electricity within the state.
Davis even suggested banning the sale of power outside of the state — though California is a net power-importer. He would create a public agency to build generating facilities and toss $1 billion at energy-conservation programs.
The State Assembly passed legislation barring private utilities from selling off more generating plants. Leftwing activist Harvey Rosenfield is circulating an initiative petition to create a public power-supply agency. The utilities want to reinstate traditional regulation with guaranteed profits.
In fact, the problem in California is incomplete deregulation. Adrian Moore of the Reason Public Policy Institute in Los Angeles argues that the state “restructured” rather than deregulated the market, “requiring far more state intervention in electricity transactions than existed before.”
Among the stupidities: The state freed wholesale but not retail prices. The state mandated that utilities sell their generating facilities but did nothing to encourage anyone to construct new plants.
No facility has opened in a decade, according to economist Hal Varian of the University of California, Berkeley, because “of unclear rules, environmental regulation, not-in-my-backyard activism and bureaucratic delay.” MIT economist Paul Joskow figures that these sorts of barriers pushed up prices by more than 10 percent last year.
Moreover, the state barred utilities from concluding long-term purchase contracts, requiring them instead to buy power on the spot market through the monopoly Independent System Operator, which greatly inflated prices. Explains Moore, “the law created a micromanaged pseudo-market where suppliers of electricity have the ability and incentive to manipulate prices to their advantage, and utilities are forbidden from shopping for better prices.”
Even so, the system seemed to work so long as power was abundant. But years of economic growth and increasing demand changed that.
California is not the only state with a problem. Floyd Norris of The New York Times notes that more than 60 plants have been proposed in New York, but “each proposed plant has local opponents and there appears to be no sense of urgency.”
However, nearly half of the states have managed to deregulate without the Golden State’s problems. And the most-talked-about proposals will make California’s situation far worse.
Mike Zenker of Cambridge Energy Research Associates complains: “The actions taken so far by regulators only put down hurdles in front of generators. Price caps, threats of forcing refunds of profits, threats to reregulate power generators — all of those things create a very uncertain environment for people who are proposing to build power plants.”
Unfortunately, the usual suspects have learned the wrong lessons. Douglas Heller of the misnamed Foundation for Taxpayer and Consumer Rights argues that “Electricity is too vital to be left to the unregulated market.” Los Angeles Times columnist Robert Scheer declares that “capitalism is falling apart.”
In fact, policymakers need to encourage real capitalism. They should eliminate all price controls.
Utilities should be left to negotiate directly with power producers. The former acquired that right only late last year — at the behest of federal, not state, regulators. City-owned utilities, like that in Los Angeles, and rural electric cooperatives should be required to produce all they can and sell any excess to the private utilities at cost. Doing so would be partial recompense for decades of state and federal subsidies.
Finally, regulatory barriers to new and burdens on old power plants should be cut. And talk of new restrictions, which would discourage new construction, should end.
San Diego is a wonderful place to live, despite the current electricity crisis. But it would be a nicer place to live if California finally and completely deregulated its energy market.
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